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Waterco Limited's (ASX:WAT) dividend will be increasing to AU$0.04 on 15th of December. This makes the dividend yield 2.2%, which is above the industry average.
Waterco's Earnings Easily Cover the Distributions
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, Waterco was paying only paying out a fraction of earnings, but the payment was a massive 117% of cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.
Over the next year, EPS could expand by 36.4% if recent trends continue. If the dividend continues along recent trends, we estimate the payout ratio will be 15%, which is in the range that makes us comfortable with the sustainability of the dividend.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2011, the first annual payment was AU$0.09, compared to the most recent full-year payment of AU$0.08. The dividend has shrunk at around 1.2% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see Waterco has been growing its earnings per share at 36% a year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.
Our Thoughts On Waterco's Dividend
Overall, we always like to see the dividend being raised, but we don't think Waterco will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for Waterco that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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